Sunday, March 26, 2017

Court of Appeals for the Second Circuit rejects argument that rules that ban lawyers from raising capital from non lawyers are unconstitutional -- UPDATED

In an important and highly anticipated opinion, the Court of Appeals for the Second Circuit has rejected an argument against the rules of professional conduct which ban lawyers from accepting capital investment from non-laywers. In this particular case, the specific rules challenged were those of the state of New York, but the reasoning of the court is likely to influence courts in other jurisdicitons.

The ruling is a big blow to those who have been proposing adopting different rules, now in use in the UK and Australia, that would allow lawyers to practice law through "alternative business structures."

On the other hand, the ruling should not be unexpected since the American legal profession has proven to be very reluctant to adopt such a view. There is a lot of literature about this and it was the hot issue in Professional Responsibility circles for the last couple of years.

Many thought the ABA was ready to point the way toward change when, in 2014, it created the Commission on the
Future of Legal Services and charged it with the task of studying how
legal services are delivered in other countries and of recommending
innovations that would improve the delivery of, and the public’s access
to, legal services in the United States.

Yet, when the Commission presented its final report at the 2016 ABA Annual Meeting it essentially merely encouraged states to “explore how legal
services are delivered by entities that employ new technologies and
internet-based platforms and then assess the benefits and risks to the
public.” As for the notion of alternative business
structures, the Commission’s report’s language was even more tentative, merely stating that “[c]ontinued exploration of alternative business
structures will be useful.” For my comment on the Commission's report go here. I also have a short article on the debate regarding the future of the profession in 41 Journal of the Legal Profession 1
(2016).

Not content on waiting for the ABA to act, the law firm Jacoby & Meyers, challenged the constitutionality of a collection of New York regulations and laws that together prevent for‐profit law firms from accepting capital investment from non‐lawyers.

In its opinion rejecting the argument, the court explained that the law firm alleged that, if they were allowed to accept outside investment, they would be able to—and would—improve their infrastructure and efficiency and as a result reduce their fees and serve more clients, including clients who might otherwise be unable to afford their services, and that the challenged rules unconstitutionally infringe the firm's rights as lawyers to associate with clients and to access the courts—rights that are grounded, they argue, in the First Amendment.

The District Court dismissed the complaint, concluding that the firm failed to state a claim for violation of any constitutional right and that, even if such rights were to be recognized, the challenged regulations withstand scrutiny because they are rationally related to a legitimate state interest.

The Court of Appeals agreed and affirmed. You can read the full opinion here.

UPDATE (3-28-17): The ABA Journal has a short post on the story here. The NY Personal Injury Blog has a comment here.